Thomas Cook cuts losses as airline growth offsets UK margin pressure

The FTSE 250 group turned over £3.23bn in the six months to 31 March, up 5% on this time last year thanks to growth to Egypt and long-haul destinations, while the airline division was boosted by the collapse of Monarch and Air Berlin last year.

Seasonal first-half operating losses of £169m were a like-for-like improvement of £13m on a year ago, though underlying gross margin worsened by 20 basis points on a LFL basis or 30% reported to 20.8% as UK margin pressure was partly offset by the strong airline performance.

The airline division, which added 70 new routes including three long-haul routes for the coming summer to increased capacity by 10%, improved EBIT losses £20m, with the tour operating arm cutting losses £4m thanks to strong performances from Northern and Continental Europe but the UK weighed.

Sales grew at the UK tour operator arm, with good levels of demand especially for Turkey and Egypt, losses grew £8m to £77m reflecting softer margins to the Canary Islands, the group's largest winter destination, caused by strong hotel cost inflation, together with a weaker sterling and increased levels of competition. Management are pushing to rebalance the destination mix towards more profitable, fast-growing destinations such as Turkey and Egypt, and to target further operating efficiencies and also cut the retail store network another 10% to around 600 stores as online sales grew 33%.

At the group level, a £11m increase in investment in the Hotel Fund joint venture with LMEY and other central costs. Net debt improved by £94m to £886m.

Looking to the summer, the programme is 59% sold, with bookings up 13%, led by Turkey, Greece and Egypt and helped by growth in growth in bookings to destinations such as Croatia, Italy and Tunisia after operations were reopened in February. Average selling prices for the tour operator arm are up 5% with bookings up 3%, while airline bookings have jumped 18% with prices rising 2%.

New operating efficiencies of £15m were delivered in the period and the target of £160-180m has been reiterated; we forecast £40m for the full year.

Chief executive Peter Fankhauser said the work done in the past two years to improve customers' experience of our flights and our holidays is bearing fruit with good revenue growth and a positive booking position for the summer.

He said the hotel investment fund with LMEY is delivering three new hotel projects underway in as many months, in addition to a first 'Casa Cook' in Spain, he was excited about accelerating the growth of the own-brand hotel portfolio and the opportunity for higher returns. "We also have high hopes for our new hotel brand, Cook's Club, which we plan to roll out at scale for Summer 2019 to attract a new generation of design-conscious holidaymakers to Thomas Cook at great value prices."

Fankhauser also highlighted new partnerships, with the transfer to Webjet delivering a fivefold growth in bookings on last year, helping fuel a 51% increase in overall bedbank bookings, while a launch of Expedia in Belgium and the UK is expected for this summer.

"As we enter our busiest period, I see positive momentum across all of our markets to deliver the best possible holidays for our customers. Our continued progress on strategy to transform the business, together with the clear desire among customers for our modern, personalised package holidays and flights, mean we are on track to deliver a performance in line with current expectations for the full year, on a constant currency basis."

TCG shares were down 3% to 140.9p on Thursday morning, having risen more than 24% since the start of April thanks in part to some bullish reappraisals from brokers.

Broker Shore Capital said meeting current market expectations would imply a circa-£25m increase in underlying operating profit. "We remain with our expectations of a £28m increase to £358m, which implies a similar £m improvement in H2 compared to H1; we would expect a better performance out the UK although comparatives are tougher in the German Airlines."

With FX is now a circa £19m drag marked-to-market versus £10m on a prior expectations, ShoreCap revised it forecast PBT to £209m with EPS of 10.3p, "although we see upside risk to forecasts given the current strength of bookings".